Question

Mehmet KİTAPSEVER has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large.

• If he opens at Site 1 and demand is high, he will generate a profit of $50,000. If demand is low, he will lose $10,000.
• If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low.
• He also has the option of not opening at either site.
• He believes that there is a 50 percent chance that demand will be high.
• A market research study will cost $5,000.
• The probability of a high demand given a favorable study is 0.8.
• The probability of a high demand given an unfavorable study is 0.1.
• There is a 60 percent chance that the study will be favorable.

a.      Should Mehmet use the study? Why?

b.      If the study is done and the results are favorable, what would Mehmet's expected profit be?

Answer 1

a. Mehmet should use the study because planning is an important part of initiating any type of project. A good study gives the results considering all favorable and unfavorable factors. In this case, the chances of high demand are more which are in favor of the opening of the bookstore.

b. If the bookstore is opened considering high demand, it is obvious to open it at site 2 which corresponds to more profit than site 1. Approximate profit at Site 2 is $80,000.